Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, January 7, 2011

Krugman is Deep in the Heart of Taxes

Paul Krugman loves those "Aha!" moments in which he believes (or at least wants US to believe) that an economy can thrive only if government tax heavily and have lots of union workers on the payroll. In his Friday column, he claims to have discovered one of those moments in his supposed expose of Texas.

Yes, Texas is having a budget shortfall in state government which is supposed to be shocking to anyone who believes that governments during a recession should cut back upon the burdens they place on others. As usual, Krugman depends not only upon a left-wing "think tank" to supply ideology masquerading as analysis, but also upon the kinds of stereotypes that really are not acceptable in academic thinking.

Krugman writes:

These are tough times for state governments. Huge deficits loom almost everywhere, from California to New York, from New Jersey to Texas.

Wait — Texas? Wasn’t Texas supposed to be thriving even as the rest of America suffered? Didn’t its governor declare, during his re-election campaign, that “we have billions in surplus”? Yes, it was, and yes, he did. But reality has now intruded, in the form of a deficit expected to run as high as $25 billion over the next two years.

Gee, I'm shocked. The country is mired in a depression and tax revenues are down everywhere. If anyone would think (or declare publicly) that Texas could be exempt from this problem because of its policies, I would also want to sell them a nice railroad tunnel that runs between New Jersey and Manhattan.

He continues:

And that reality has implications for the nation as a whole. For Texas is where the modern conservative theory of budgeting — the belief that you should never raise taxes under any circumstances, that you can always balance the budget by cutting wasteful spending — has been implemented most completely. If the theory can’t make it there, it can’t make it anywhere.

Once again, Krugman gives us a caricature of analysis versus serious thinking. In theory, obviously, if one cuts any budget enough, be it a state, national, municipal, or home budget, one can balance it. The issue, however, is the opportunity cost of raising taxes, and Krugman has been saying throughout the economic crisis that there is no opportunity cost when it comes to government spending. (In fact, while he has not openly said he believes in the Keynesian balanced budget multiplier -- in which higher taxes lead to more spending, which revitalizes the economy -- he writes as though he believes in it.)

As I see it, there is no "theory" here, unless one brings in the balanced budget multiplier "theory." Instead, we are dealing with an accounting problem: How does a state -- which is required by law to have a balanced budget each year -- deal with the problem in which its projected spending outstrips its projected revenues?

In fact, it seems to me that Krugman discredits his earlier statement in the next paragraph:

How bad is the Texas deficit? Comparing budget crises among states is tricky, for technical reasons. Still, data from the Center on Budget and Policy Priorities suggest that the Texas budget gap is worse than New York’s, about as bad as California’s, but not quite up to New Jersey levels.

First, the CBPP is a left-wing organization that is not exactly going to be objective in this situation. My guess is that if someone who were publicly disagreeing with Krugman were to use something from the Heritage Foundation, Krugman immediately would claim that the study is "tainted."

Second, Krugman includes three states that have followed pretty much the Krugman Policy Standards of spending and raising taxes. If Krugman's "theory" were to be applied here -- that militant public sector unions are "good for the economy" and that raising taxes will help stymie a recession -- then California, New York, and New Jersey should be wallowing in surpluses. Yet, they face real crises, and according to Krugman's "theory," that should not be the case.

In other words, Krugman really is saying nothing that is significant. Furthermore, he repeats the canard about education spending, as though it were the key to academic and economic success. If that were true, then Washington, D.C., public schools, which spend more per pupil than any states, would be the best in the country instead of one of the worst systems.

There is a much larger issue here. A welfare state is not an economic plus; it is a financial burden. One can argue as to its necessity, well as debate whether or not it makes things better in the long term, but Krugman is not interested in doing that.

I am not defending Texas or Gov. Rick Perry, or anything about its state government. Being that Texas seems to have this problem about prosecutors being out of control (something with which I deal in my other blog), I have nothing good to say about the issue of governance in that state.

However, if Krugman is wanting to argue that the "theory" of cutting spending is discredited, then one would have to claim that his "alternative hypothesis" (that raising taxes and increasing spending is the way to beat a recession) is true. Yet, we see the "alternative theory" at work in California and New York, and both of those places are bleeding jobs and revenue.

Krugman, not surprisingly, is silent on that point. But I have a better idea: Let us see how the Illinois legislature's current plan works. The Democrats, which control politics in that state (which means they have all of the answers, if one follows Krugman's partisan missives), have proposed a 75 percent increase in the state's income tax rates and a huge increase in the cigarette tax.

If Krugman is correct, then Illinois should be able to solve its budget problems and also create new avenues of prosperity. Perhaps we should revisit the state in a year to see if Krugman's "theory" is correct.

17 comments:

The legislators in Illnois do realize the basic economics that they won't collect cigarette taxes if people simply refuse to buy the cigarettes?

Happened in Alaska that smokers spent $100 on bulk purchases of cigarettes in the five month period before a new cigarette tax. That's how dedicated the ordinary person is to avoid paying a single tax.

Krugman also has a blog-posting up comparing unemployment figures between New York and Texas, that apparently looked similar. Of course Krugman failed to mention that Texas has seen a population increase tenfold that of New York over the last decade, and that Texas also attracts a considerable amount of illegal immigrant workers. Krugman can't really make these kind of comparisons when the demographics of New York and Texas are so different.

>First, the CBPP is a left-wing organization that is not exactly going to be objective in this situation. My guess is that if someone who were publicly disagreeing with Krugman were to use something from the Heritage Foundation, Krugman immediately would claim that the study is "tainted."

This is hilarious. First you dismiss the information Krugman gave that came from a liberal leaning think tank because it's "biased", but then you try to criticize Krugman for potentially doing the the same thing you just did in a non existent hypothetical situation. Apparently two wrongs (the second wrong being hypothetical) make a right. I could just as easily dismiss everything from the mises institute because its biased. Unless you have something to refute that information, your argument here is ridiculous.

I guess this is why I'm not a conservative. I would never argue that a state needs a gargantuan public school system, university system, drug war and prison system. And I would never argue that if it had those things, it would never run out of money to pay for them if taxes are kept real low.

Krugman might have a point. Of course, the solution is to abolish government schools and the drug war, not raise taxes. And this says nothing in favor of public service unions and high taxes.

I'll add that just because the state workers aren't in unions doesn't mean that the politicians in the state don't regularly steal (legally of course) from the taxpayers to pay off their friends in the government with higher pay and benefits, and get some of that money back in campaign contributions.

I'm going to assume that the primary cause of the "revenue" shortfall is the funny money induced Great Recession. Thanks to the obfuscations of folks like the Obtuse-nik Krugman, it's not well known that funny money causes the boom/bust cycle. It's most likely that the recent bust was the primary cause of the unexpected shortfall.

Uhhh im pretty sure we had a boom budt cycle pre federal reserve. Infact booms were greater and busts were worse. We spend around 19% of our time in recession now compared with upwards of 40% pre fed. Central bank or no centtal bank there has always been a no bust cycle and it is ridiculous to assert otherwise.

It would be a miracle if one of our in-house critics actually had some familiarity with Austrian theory.

Pre-Fed booms and busts were cause by FRACTIONAL RESERVE BANKING which is inherently prone to panics. Where loanable funds exceed real savings, you are on the road to hell. Indeed, if you are lending something other than someone's savings, exactly what is it that you are lending?

Anonymous, how can you not know that? Or at least know that that is our position?

I've looked into your career and background a bit and I must say I'm impressed. Do you have your own blog? I couldn't find anything.

At any rate, I'd like to engage you on the issue of fractional reserve banking. The Rothbardian view is that fractional reserve banking is (basically) illegal (fraud) and, as you say, is the source of artificial credit expansion. But is this the case only if there is a central bank, or do you think it would be the case in a free banking climate as well?

I enjoy your blog. Just read your article with Amit Shah in "New Perspectives on Political Economy." Very nice background. I knew about the 1990s "deregulations" but not the importance of the 1980s law changes.

"In 1977, Professor Hayek explained on "Firing Line" that Keynes' "General Theory" was "entirely ad hoc" and concocted merely to trick British workers in the 1930s into accepting lower real wages as the result of purposeful government inflation. "

ahh...Bob? You do realize Hayek was agreeing with Keynes when he said that, right?

I've actually stumbled into several comments of yours repeating that line in several blogs. Did you not know that Hayek was an immoral money printing statist as well? Why are you quoting that statist and putting him in a positive light? He wanted to coerce people into diluting their funny money.

Krugman left serious economic thinking long ago. The fact that he ignores the opportunity cost of government spending is one thing, but the more sobering fact is that according to his theories, the Soviet Union should have been a thriving nation. His theories are flawed. Time for him to lose the pride and find some good economics.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).